Ryanair Holdings plc (RYA ID) Exuberant, Not Irrational

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1 COMPANY NOTE Ireland Consumer Airlines Ryanair Holdings plc (RYA ID) Exuberant, Not Irrational Key Takeaway We upgrade FY16/FY17 forecasts 20%/10% and PT to 15.5: exuberant, but not irrationally so. Profit and ROCE momentum are strong and the cash war chest gives options. Catalysts: September AGM and October digital roll-out. Stronger players are getting more of the fuel benefit to stick: retain Buy on Ryanair but IAG the top pick. Yesterday's positive profit warning confirmed Ryanair as a clear winner this summer, highlighting the diverging fortunes across our Travel & Leisure coverage. CEO Michael O'Leary acknowledged that favourable industry trends accounted for perhaps 50% of the improved performance, citing bad August weather in Northern Europe, stronger GBP encouraging UK families to travel to Europe and some substitution from terrorismaffected North Africa destinations to the Med. UK-oriented pubcos and hotel companies have been less fortunate than the LCCs this summer. The other 50% is attributed to commercial improvements from the 'Always Getting Better' programme as the business model continues to evolve positively. We upgrade FY16 profit forecasts by 20% and FY17 by 10%, driven by average fare assumptions. Guidance for 1H (to September) fares up over 2% implies 2Q fare growth of >6%; a dramatic improvement from -4% in 1Q. Close-in bookings are 'surprisingly strong' across the board, including city-city routes and ramped German expansion as well as beach routes. We forecast 0% fare growth in 3Q (guidance flat from -4%-8%) and -2% in 4Q (guidance -2%-4% from -4%-8%). Our 1,200m FY16 PAT estimate sits at the mid-point of the revised 1,175m- 1,225m guidance. We forecast three year PAT CAGR (FY15-FY18) of 16% on a FY15 base which itself represents 23% three year CAGR. Financial Summary BUY Price target (from 13.50) Price Net Debt (MM): ( 1,217.7) Market Data 52 Week Range: Total Entprs. Value (MM): 17,407.7 Market Cap. (MM): 18,625.4 Shares Out. (MM): 1,362.5 Float (MM): 1,293.1 Avg. Daily Vol.: 1,506,410 EQUITY RESEARCH EUROPE Unrivalled war chest. We forecast net cash of 1.2bn at March 2016 which now includes proceeds from the disposal of Ryanair's 30% stake in Aer Lingus. This puts the company in a very strong position to return surplus cash to shareholders and/or weather any competitive 'price war'. An update is expect with the AGM on 24 September. A 400m special dividend would leave RYA unlevered and equates to c. 0.30/share and a 2% yield. Valuation/Risks Our PT moves to 15.5 (from 13.5) based on a 40% premium to sector 2016 EV/IC, justified by RYA's strong earnings momentum and best-in-class margins and returns. We forecast 19% adjusted CROIC by FY17, the highest in 10 years. At 14.8x/13.2x FY16/17 PE and 8.8x/8.0x EV/EBITDA we do not see the valuation as demanding. Risks: economic, industry capacity, oil price & FX. Mark Irvine-Fortescue * Equity Analyst +44 (0) mark.irvinefortescue@jefferies.com Ian Rennardson * Equity Analyst +44 (0) irennardson@jefferies.com James Letten * Equity Associate +44 (0) james.letten@jefferies.com * Jefferies International Limited EUR Prev. 2014A Prev. 2015A Prev. 2016E Prev. 2017E Rev. (MM) -- 5, , , , , ,668.6 EBITDA (MM) -- 1, , , , , ,057.2 EV/EBITDA 17.2x 12.3x 9.4x 8.5x PBT (MM) , , , ,532.3 Dividend EPS Adjusted FY Mar FY P/E 36.9x 22.0x 15.5x 13.9x Price Performance Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 4 to 7 of this report.

2 Ryanair Forecasts Table 1: Summary Forecasts Changes for Ryanair Forecasts ( m) FY16e New FY16E Old % Chg FY17E New FY17E Old % Chg FY18E New FY18E Old % Chg Sales 6,502 6, ,669 6, ,958 6,869 1 PAT 1, ,341 1, ,344 1,234 9 EPS ( c) Drivers of Change Better revenue yield outlook Source: Jefferies estimates Table 2: Ryanair Profit & Loss FY12-FY18E Year end 31 March ( m) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Revenue 4,325 4,884 5,037 5,654 6,502 6,669 6,958 YoY growth % 19% 13% 3% 12% 15% 3% 4% Operating costs ex-fuel 1,714 1,852 1,912 2,132 2,449 2,667 2,938 YoY growth % 13% 8% 3% 12% 15% 9% 10% Fuel 1,594 1,886 2,013 1,992 2,061 1,798 1,764 EBITDAR, clean 1,018 1,146 1,112 1,530 1,992 2,203 2,256 24% 23% 22% 27% 31% 33% 32% Operating leases Depreciation Operating profit, clean ,043 1,440 1,588 1,589 YoY growth % 20% 16% -8% 58% 38% 10% 0% Operating margin 14% 15% 13% 18% 22% 24% 23% Finance income Finance expense Profit before tax, clean ,372 1,532 1,545 Exceptional Tax Tax rate 13% 13% 12% 12% 13% 13% 13% Profit after tax, clean ,200 1,341 1,344 EPS diluted, clean ( c) YoY growth % 25% 17% -6% 69% 40% 12% 0% Source: Jefferies estimates, company data page 2 of 7

3 Table 3: Ryanair Cash Flow & Net Debt FY12-FY18E Year end 31 March ( m) FY12 FY13 FY14 FY15 FY16E FY17E FY18E EBITDA 927 1,048 1,010 1,421 1,861 2,057 2,096 Other Change in working capital Cash flow from operations 1,096 1,122 1,144 1,824 1,972 2,116 2,173 Net interest Tax Net cash flow from operations 1,020 1,022 1,044 1,689 1,736 1,868 1,928 Capex ,000-1,100-1,000 Disposals Acquisitions Cash flow from investments ,100-1,000 Dividend Change in equity Change in debt , Change in restricted 105-1, , cash/deposits Cash flow from financing 680-1, FX Net cash flow 680-1, Cash opening 2,028 2,708 1,241 1,730 1,185 2,038 2,806 Cash closing 2,708 1,241 1,729 1,185 2,038 2,806 3,734 Net (debt)/cash ,218 1,986 2,914 Lease adj average net debt -1, ,165 Source: Jefferies estimates, company data page 3 of 7

4 Company Description Ryanair is a leading low cost carrier (LCC) passenger airline, serving short-haul, point-to-point routes across Europe (and Morocco). Founded in 1984, Ryanair becoming a public company in 1997 (listed Dublin and NASDAQ), growing rapidly under the stewardship of Michael O Leary (CEO since 1994). The group now carries c80m passengers, serving 180 airports across 29 countries, with a fleet of 303 Boeing s. Key to Ryanair s strategy is low operating costs, allowing it to sell low-cost fares profitably. There are four primary cost areas that Ryanair strives to contain: 1) Aircraft equipment costs, 2) Personnel costs, 3) Customer service costs, 4) Airport access and handling costs. Analyst Certification: I, Mark Irvine-Fortescue, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Ian Rennardson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, James Letten, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-us analysts: Mark Irvine-Fortescue is employed by Jefferies International Limited, a non-us affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: Ian Rennardson is employed by Jefferies International Limited, a non-us affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. Registration of non-us analysts: James Letten is employed by Jefferies International Limited, a non-us affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Company Specific Disclosures Jefferies Group LLC makes a market in the securities or ADRs of Ryanair Holdings plc. Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. 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